Greetings From Asia, Buy Apple

By Teresa Rivas

Apple (AAPL) was pushing past $490 at recent check, helped by a raft of positive analyst commentary this morning. Jefferies upgraded the stock from Hold to Buy, while Cantor Fitzgerald, Cowen & Co., Piper Jaffray, Robert W. Baird and Sanford Bernstein also weighed in on the stock. Demand for the iPhone and analysis of the company’s suppliers were major theme, with a bit of iWatch speculation thrown in as well.

First up, Jefferies’ Peter Misek, who took the stock to a Buy, with a $600 price target. He writes that after visiting suppliers in Asia last week, he sees the company as able to overcome near-term risk, as he looks toward the iPhone 6.

What’s changed? We were negative on revs and GM, but we think suppliers have become far more lenient on price, boosting GM. Also the ecosystem is excited about the iPhone 6, which we feel is warranted. We think the stock will appreciate ahead of the iPhone 6 launch and that N-T rev risks will be discounted by investors.

He also sees the iPhone 6 filling Apple’s product gap: Our analysis points to ~50% of smartphone shipped in Q2:13 had >4″ displays vs. ~20% in Q2:12. Importantly all the incremental smartphone growth Y/Y came from the >4″ category that Apple does not address. We still see issues in developed markets and in high-end handsets, but a poor iPhone 5s/5c cycle means a bigger upgrade opportunity for the iPhone 6. We think the 85M iPhones eligible for an upgrade when the iPhone 6 launches (we think Apple is targeting Sep 2014) could be boosted by another 5-10M from people who skipped the 5s/5c cycle. While we think a 4.8″ screen iPhone could lead to Apple regaining share vs. Android, just the iPhone installed base refresh supports upside to St FY15 estimates.”

Cowen & Co.’s Tim Arcuri was in Asia as well, and he remains confident that the Street is underestimating the company’s sales and margins.

We believe Apple’s supply chain is seeing incremental positive revisions as iPhone demand (particularly 5S) remains elevated post product launch. We continue to believe street estimates are likely conservative as iPhone demand remains solid. Cowen estimates for iPhone are ~36MM in September Q and ~56MM in December Q and, based on our work in Asia, we feel good about these above-Street numbers. At the same time, we believe that Apple is likely seeing some ramp issues with new parts (camera module, fingerprint sensor) which will likely cause 5S supply to remain constrained potentially through year end. While FQ1:14 (Dec) should be a strong Q for both iPhone shipments and gross margin, we feel that initial indication points to a strong drawdown for the supply chain in the March Q and component shipments, at this stage, look to us to be down materially.

For iPad, we expect Apple to launch a new iPad and iPad Mini (retina likely delayed until 2014) which should also help December Q growth. Cowen estimates for iPad+iPad mini are ~15M in FQ4:13 (Sept) and ~23M in FQ1:14 (Dec).

Elsewhere, Cantor’s Brian White reiterated his Buy rating and $770 price target as he unveiled his September and third quarter estimates:

We estimate preliminary September sales for our Apple Barometer rose by approximately 9-10% MoM and nearly in line with the average increase of 11% over the past eight years. Keep in mind, Apple has traditionally launched the iPhone in June or July; however, this began to change in 2011 and thus historical comparisons for September can be skewed. Additionally, the preliminary performance this September is well above the up 3% MoM in 2012.

For 3Q:13, we estimate preliminary sales fell by 3-4% sequentially for our Apple Barometer and well below the average increase of 21% over the past eight years. Keep in mind, Apple’s September quarter sales outlook (down 4% to up 5%) was well below typical seasonality of up 18% QoQ for past September quarters over the past eight years. On September 23, Apple announced that 4Q:FY13 sales would come in at the high end of the company’s original expectations. We would also point out that Apple’s 4Q:FY12 sales a year ago increased by just 3% QoQ with the ramp of the iPhone 5.

Piper Jaffray’s Gene Munster was upbeat on Apple’s iWatch, given the firm’s recent consumer survey. They see as many as 10 million units sold in the first year:

We recently surveyed 799 US consumers about whether they would buy an Apple iWatch that connected to an iPhone for $350. Of those consumers with an iPhone, 12% said they would be interested in purchasing the watch while 88% would not be interested in purchasing a watch. We believe that since US consumers are likely on average wealthier than the average International iPhone owner and that consumers may say they are wiling to purchase a watch than they would if they actually were faced with the decision, it is likely that the actual percentage of global iPhone users who would buy the watch is lower. Thus we believe that conservatively 2-4% of the global iPhone user base may actually purchase an iWatch in the first year of availability. Our 2-4% of the user base assumption leads us to 5-10 million watches in the first year.

Using the midpoint of 7.5 million watches, with an average selling price of $350 and 30% gross margin, Munster projects the iWatch would add $2.6 billion to his 2014 revenue estimates.

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